Good afternoon, ladies and gentlemen. My name is Leonie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Artis REIT's Second Quarter 2019 Conference Call.

(Operator Instructions)

Today's discussion may include forward-looking statements, which include statements that are not statements of historical facts and statements regarding Artis REIT's future financial performance and its execution of initiatives to deliver unitholder value. Such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other facts that could cause actual results to differ materially from such statements. Please see Artis REIT's public filings for a discussion of these risk factors, which are included in their annual and quarterly filings, which can be found on Artis REIT's website and on SEDAR. Thank you.

I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

Thank you, moderator. Good day, everyone, and welcome to our Q2 2019 conference call. So again, my name is Armin Martens, the CEO of Artis REIT. With me on this call is Jim Green, our CFO; Phil Martens, EVP of U.S. Operations; Kim Riley, VP of Investments; Heather Nikkel, VP of Investor Relations; and Jackie Koenig, SVP of Accounting.

So again, thanks for joining us, I'll ask Jim Green to review our mark -- our financial highlights and some metrics, and then I'll wrap up with some market commentary, and then we'll open up the lines for questions. Go ahead, please, Jim.

Thanks, Armin, and good afternoon, everyone. I'll keep my comments relatively short. I think as probably the majority of people on the call are aware, our third quarter earnings press release on November 1, 2018, announced a series of new initiatives for the REIT. We've been very busy executing on that strategy, which I suspect will become the main focus of this call. So I'll touch on that in a minute. And then no doubt, there'll be questions on it after. The impact of executing the strategy has, in our opinion, resulted in one of the best quarters for us in quite a while. So very pleased with our results this quarter. I'll touch on a couple of highlights, and then we'll turn it back.

Artis remains a diversified commercial REIT, investing in office, retail and industrial properties, with assets in 5 Canadian properties, 6 U.S. states. Based on Q2 NOI, the REIT is now 52.5% weighted in Canada, 47.5% in the United States. Since last quarter, that is down a little bit in Canada and up a bit in the U.S. As we announced with our initiatives, we expect the U.S. to become even a larger piece of our operations. On an asset class basis, now 52.2% weighted in office, down a bit from last quarter; 19.5% weighted in retail, also down a bit from last quarter; 28.3% weighted in industrial, up from last quarter.

Historically, Artis has had a larger presence in the province of Alberta. We have been reducing that presence, I think, very successful. We sold another Calgary office building this quarter. We do continue to have a presence in the Calgary office market, but it's becoming a pretty small piece of our NOI. For Q2 specifically, it contributed 6.1% of the REIT's NOI. Relatively small exposure to Calgary office tenant maturities in the near future, with only about 85,000 feet left to complete in 2019, only 46,000 feet maturing in all of 2020. Not a ton of risk to roll over in that market, which continues to be somewhat difficult.

Artis continues to be active in both new developments and redevelopment of our existing properties. The end of June, we had approximately $146 million invested in projects considered under development. During the quarter, there was roughly $38 million, or a little more, actually, invested into the development projects and transferred approximately $93 million of properties from under development to completed projects. So we're pleased to see those projects completed and the income from them helping our metrics. As detailed in the MD&A, there are several new development projects that remain underway, including a new residential tower, 300 Main Street in Winnipeg, and new industrial space in Houston, Phoenix and Denver. We also have several development projects in the planning stages where the construction has not actively started. They are all progressing well through the development stages.

Able to maintain our balance sheet. Debt to GBV is actually up just slightly this quarter to 51.9% from 51.7% last quarter. The main driver of the small increase in debt to GBV is the timing of purchases for our planned unit buyback compared to asset sales, which will happen in future quarters. So we anticipate bringing debt to GBV back under 50% as quickly as we can with the asset sales being -- becoming completed. Our EBITDA interest coverage ratios remain healthy despite carrying a bit higher debt at the present time. Unit buyback combined with good same-property growth, completion of the developments is having a definite positive effect with FFO coming in at $0.36 this quarter, up from $0.34 last quarter and up from $0.32 in the comparative quarter last year. So year-over-year, roughly a 12.5% increase in FFO. We're very pleased with that. AFFO comparably up $0.02 this quarter from last quarter to $0.27 and up $0.03 from Q2 of '18. Again, that translates to about a 12% increase in AFFO year-over-year. Payout ratio is extremely conservative: 38.9% of FFO, 51.9% of AFFO.

So just a quick update on the initiatives. I'm sure you'll hear from -- more from Armin and Kim on it in a minute. But the new initiatives had the goal of increasing cash flow, increasing unit values by increasing NAV, improving the focus and quality of our portfolio. Distribution was reset to $0.54 annually, resulting in a very conservative payout ratio, as I just mentioned, bringing up cash to fund our development pipeline. The plan also included selling noncore asset sales somewhere between $800 million to $1 billion, and this process is well under way. Note at June 30, we've completed sales of roughly $236 million. We have a further $398 million in our held-for-sale classification. We anticipate most of those will close in the next 2 or 3 quarters. You'll note from the Subsequent Events section that one more property has closed already in the month of July. Further properties are anticipated to be added to the held-for-sale group in the coming quarters.

The initiatives also included using a portion of our sales proceeds to buy back our units using our NCIB, and we started this as soon as the announcement was made in November of last year. From November to June 30, we had repurchased 12.9 million units at a cost of just over $135 million, used our line of credit to fund these purchases and plan on repaying the line as assets sell. That ties back into the reason for the debt being a little higher than it was at year-end. Our opinion on the plan to buy back units is well on track and probably ahead of schedule where we anticipated we would be.

I'll touch on just a couple of highlights from the operations, and I'll pass it back to Armin. So on the fair value of investment properties. They're all, of course, valued at fair value, there was a decline this quarter of roughly $24.5 million. Major changes were due to lower values on some of the properties we've sold or are planning to sell. As we anticipated when we set out into this program, we anticipate that entire group of $800 million to $1 billion will sell at or above our IFRS value. However, some of the ones that we have sold first were actually a bit below the IFRS value. We've recorded that write-down this quarter. We anticipate selling assets in the coming quarters that will be above our IFRS value such that it nets out at the end of the program.

I touched briefly on the debt to GBV. We do remain comfortable with it. It's a little higher than we would like it to be, obviously, but we think that will come down in coming quarters. Unencumbered assets will remain strong at roughly $1.9 billion. The unsecured line of credit remains at $700 million, nonrevolving unsecureds. Very comfortable with our credit facilities and available liquidity.

I'll touch on same property for a minute. It's always a nice one to see that, that is also a very nice positive this quarter, up 2.9% in functional currency and a positive 4.6% once foreign exchange is factored in. We also present a stabilized same-property calculation which eliminates the properties planned for disposition as well as the entire Calgary office sector, which we hope to consider that stabilized. So once we back those out, the growth in same property would have been 4.6% in functional currency, 6.37% once FX is factored in. Industrial continues to show the strongest performance across the asset classes in both countries, with 2.1% growth in Canada, 12% growth in the United States.

On EBITDA metrics, the main ratios we track are EBITDA interest coverage and debt to EBITDA. Both those metrics, EBITDA interest coverage, we're very comfortable with it. Debt to EBITA actually improved a bit this quarter to 8.8%. We're also pleased with that.

I'll touch on NAV for a minute. So given that we have fair-valued of the properties, we can calculate the net asset value per trust unit. The net asset value came in this quarter at $15.37 compared to $15.55 from last quarter. So it is down. There's a drop of $0.18 quarter-over-quarter. If you look on the income statement at the impact of FX, both on the income statement and our other comprehensive income, there was a $0.19 loss on FX. So more than 100% of the decline in NAV is driven by FX. There was also the loss from fair values that I mentioned before offset by the income exceeding distributions and also a gain from the unit buyback program.

For subsequent events, I guess we ended the quarter with $95 million cash on hand and $173 million undrawn on the line of credit. We're very comfortable with our liquidity. Several events in the subsequent events note, which we believe continue to reflect our strategy, intelligent recycling of capital, and we plan to continue to focus on a strong balance sheet and the overall quality of our portfolio.

That completes the financial review. Very pleased with FFO growth, pleased with same-property growth, pleased with the development activities. I've got to say this is one of the nicest conversations I've got to have in a while, so much appreciated.

Yes, okay. Thanks, Jim. So again, folks, on balance, we feel we're on track to having a much better year this year than last year. And as mentioned, we're making good progress on all fronts and delivering strong performance metrics for our unitholders. So our weighted average rental increases, our same property NOI growth, our NOI growth in total, our FFO and AFFO per unit are all solid and improving numbers. And even our EBITDA debt metrics improved a little.

And as mentioned, we are making great progress on the strategic initiatives that we announced last Q3 last year. So we're in the third quarter of these initiatives, and we're looking forward to the next quarter already. The distribution is very conservative, payout ratio in the low 50%. It's the lowest payout ratio of all the commercial REITs on the TSX. We feel it's quite bulletproof today for right now and for the future. Our unit buyback program has, of course, been very successful and accretive, and we're well ahead of plan there. Our dispositions are ahead of plan, definitely feel confident that we'll be able to achieve 80% of our 3-year plan by the end of this year, if not even more. We're very confident we'll be able to successfully dispose of at least $600 million of our properties, if not more, by year-end, on time and on price, on balance, and that's not always -- that's not always a straight line, but on balance on prices that correspond to our NAV of over $15 per unit.

In the meanwhile, our portfolio is performing well. Office markets are still inconsistent, but this is -- I still feel this is the year that things level off for our portfolio in Calgary, and that will help us a lot. Meanwhile, our retail and industrial properties had a very good track record and continue to deliver onto organic growth. And our development pipeline is on track and continues to deliver good results as well. We invite you to look at our MD&A and investor presentations for more color here.

I think it's important to note that not only are our financial metrics improving but so is our portfolio of properties. Okay. So we're reducing our office and retail weighting, and we're increasing our ownership in -- of industrial properties and also reducing the number of secondary markets that we're in. Our Calgary office exposure is consistently shrinking. Our U.S. retail exposure was -- will soon be 0. And the remaining retail properties that we have will shrink from 20% to 15% of our total portfolio, but it will be open-air properties and in Western Canada only. And we feel we're in a good place here. And as we mentioned, office will be shrinking, and weighting in industrial will be increasing.

So looking ahead, we will continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently streamlining and improving our portfolio. We cleared the integrity of our balance sheet and our credit rating as well as implementing our new strategic initiatives continue to be of utmost important to us.

So that's our quarter, folks. Again, we thank you for joining us on this call. We open -- I'll ask the moderator now to open the lines for questions.

Sure. So that was just getting up about the level where we wanted to cap off the debt. So deliberately, we did slow down the unit buybacks. We'll resume as we close some more sales and get our debt down a little bit, but we didn't want it to get too much higher and get anybody fussing over the debt levels.

Hoping or thinking? We're always -- we're cautiously optimistic. We're cautiously optimistic that we can stay on that bandwidth in the same way that we are. This was a pretty good quarter. Maybe we dipped 100 bps, but we're still -- I still always think on balance of between 2% and 3%. And when we hit 4%, that's a bonus for us.

We can't put our finger on it, but yes. On balance, I'd say the answer is yes. It is a good time to be selling real estate. And there's a lot of money out there for -- especially if it's value-add money or -- there's a lot of money out there for, especially in the U.S., in particular, on real estate. It's still asset class and market and submarket specific, but there's more money available for real estate, commercial real estate than I'd seen -- for them, for sure, at this time last year.

And maybe looking forward in terms of your development pipeline. Obviously, this quarter was probably a little bit stronger than the average quarter, but how should we be thinking about deliveries over the next year or so? Like, is there any color you can provide on the longer-term pipeline?

Well, right now for Park 8Ninety, we are working on a third phase and parsing out a fourth phase. Third phase will be completing construction in the fourth quarter. The Denver development is completing construction in this quarter, the third quarter. We're already getting good pre-leasing activity on both of them. We closed on one of the buildings in Denver for the full building with a credit-rated tenant. And we hope to have them paying rents really in the fourth quarter. So we're hoping that by the fourth quarter, we're going to see another pickup as well.

And back to Park 8Ninety, that's Houston. And there's a couple of phases left to go there that we're going to -- we're accelerating. I think Matt, by the end of -- right through this year and all of next year, [it was just housing we have] to deliver NOI from new industrial development. And we are working hard now to look for more industrial development with our partners.

Just wondering if you can give us any update or color on what the Special Committee has been up to and whether or not you've been fielding a lot of incoming calls or had conversations about maybe different strategies of how you want to take the REIT?

None of us in this room are on the Special Committee. We talked about it earlier, and I was reminded that I'm not a spokesperson for the Special Committee and can't give any -- make -- give any comments there. And all I can do is assure you that in the event they have anything remotely important to announce, they will disclose it to the public immediately.

Okay. All right. And then with regards to the asset sales, have you gotten a lot of incoming calls in terms of not just selling the one-off assets but maybe on a portfolio basis? Just trying to get a sense of, there's no secret with the attractiveness of industrial, whether or not you've fielded calls for that segment or other segments of your portfolio.

Sure. The industrial, we like to say we could sell before dinnertime, except it's already dinnertime now. But industrial, we get a lot of calls about that. But that's -- the asset class, we're not disclosing on, not one single building. We're already over 98% occupied on both sides of the border, our Canadian portfolio as well as our U.S. portfolio. To our GTA, industrial is 99.9% occupied, [nothing embarrassing] about that. Our Minneapolis industrial is 99% occupied.

Really good numbers, good organic growth, new developments as we build them. So we want to grow on our industrial portfolio. That's where the inbound calls are coming. And otherwise, what we're focusing on is -- we're very focused on what we're selling. And if we get inbound calls, it's only pertaining to the stuff we're selling. And I can't remember the last time I had a portfolio request. In this market, there still is a, in my view, a portfolio of discount. So we're not interested in that. The only portfolio of premium we might get, it would be for industrial, but that's not -- we're not selling that. We're doing fine with our dispositions. We're -- we feel very comfortable with them.

And then concluding. Our Calgary office, we'll see some good things happening there soon, with that Calgary office disposition.

Okay. Actually, on the topic of Calgary office, it's small, but I'm just curious as to why you bought Centre 70? I guess it cleans up the structure, but is there something compelling about that asset that you wanted to own? Or what was behind that acquisition?

But to be clear, it's performing very well also. It's 94% occupied. The rents have stabilized at a lower levels. We've gone through the tough times in that building. It's in very good condition. It's a building we don't mind owning. But yes, it was about cleaning up the structure, simplifying things.

No, it's being actively marketed. Now as you may be aware, we feel there's a lot of interest, a lot of interest, and we're very confident that we'll be transacting on that. And something will be firmed up to you in Q3, for sure.

The target dispositions for this year, I mean, you mentioned $600 million, so it's fairly consistent with the guidance that you expressed last quarter. It seems like that process is moving along nicely. When you look at the fair value loss that you incurred on the assets sold during Q2, was there anything in particular with respect to those assets that would have driven that loss?

The 2 Denver office assets, one of which just lost its major tenant. So roughly -- tenant occupied roughly 70% of the building, will be vacating in October. The other one was a bigger building. So both of those, we took a loss on them just to clean them up out of the portfolio.

Yes, we can tell you we had a gain in every single disposition except for those 2 Denver ones. And from there, we had bad luck with a major vacancy and decided to solve the problem quickly and sell the property at as fast as we could and redeploy the proceeds in our unit buyback program.

Okay. And then -- I appreciate the commentary on the NCIB. There's some pretty good progress there. I think during the last call, you kind of briefly touched on the potential from SIB, and I appreciate that the leverage has ticked up a little bit, a little bit toward the upper end of where you want it to be. But once -- it seems like the disposition program is going fairly well. How do you think about a potential SIB in the second half of this year today versus 3 months ago?

Well, it's not at the top of our priority list. We want to finish up with the NCIB. We're at 90% done. We want to get it to 100%. And we want to bring down our debt some more, and then we will take a look at that scenario. You wouldn't see it happening in Q3.

Got it, okay. And then just separately, I noted an acquisition -- or an unconditional purchase agreement on Page 12 of your MD&A in Minnesota. Is that a land purchase? Or is that a purchase of a building? Just provide a bit of color in terms of what you're buying there.

So we're just getting -- for sure, it's still early days. We're just getting -- almost at the typical floor level now. I mean it's 40-story building. Almost at the typical floor level now. And it's -- we're looking at completing -- a completion in the first half of 2022. So it's a long ways to go. I mean it's on time, on budget so far. I shouldn't say on time. We got a slow start, but it's on budget, and it's in a good place, with a good rhythm now, with our typical floor construction. That's the 40-story tower, multifamily, with commercial on the main floor. The commercial is leased on the main floor. In addition to that, there's a link in between that 40-story tower and our 30-story office building that's almost finished, and that's fully pre-leased as well. But the link will be finished this fall and will -- it will demonstrate progress. We're happy for that. And it's fully leased with a 20-year lease term. And it's all about that 40-story building getting built and then the joy of leasing up that building.

That's purpose-built multifamily rental. There'll be a lot of amenities, very practical amenities. We have a dog run there, dog bath. And then at the top floor, the full penthouse floor is reserved for what we call social amenities for all of the residents. So you can live on the third floor, you can live on the 16th floor, but you can still go to the 40th floor and enjoy the view and enjoy the meeting rooms and the games room and have parties up there as well. We think we have a good concept there.

So we've got -- you might recall, we qualified for property tax abatement for an 18-year term. So we have 18 years of property tax abatement, both school tax and municipal taxes. So that does help as well in terms of phasing and leasing up and getting the numbers to work for us.